In the latest fraud case to rock the commodity finance world, Singapore-based Agritrade International has been accused of “massive, premeditated and systematic” deception by banks left exposed to the firm following its collapse.
After running into financial issues earlier this year, the commodity trader applied to Singapore’s high court for a moratorium order on US$1.55bn of outstanding liabilities to creditors, including US$983mn owed to secured lenders. This application was rejected, with the court instead choosing to appoint EY partners Angela Ee and Aaron Loh as interim judicial managers, leaving lenders, including ING, UOB, MUFG, Commerzbank, Maybank and Natixis with exposures of around US$600mn.
Court filings by the banks seen by Reuters make accusations of documentary fraud and deception to secure trade finance from multiple lenders on the same trades. ING reportedly alleges that Agritrade, its chief executive officer Ng Xinwei and his father Ng Say Peck “misrepresented the company’s financial position to various bank lenders” by issuing multiple bills of lading (BLs) in order to obtain financing from multiple banks for the same shipment. For its part, Commerzbank reportedly alleges that shipments of coal it had financed simply didn’t exist.
BL fraud is one of the oldest – and most pernicious – deceptions in global trade. These paper documents, little changed in centuries, can be easily forged, and given that cross-checking between banks does not always happen, a dishonest actor can present duplicate bills to numerous financiers.
This is just the latest in a string of high-profile fraud cases in Asia. From the Qingdao metals fraud to the Access World nickel fraud, the Punjab National Bank letter of undertaking fraud, and the Sinocore International documentary fraud, it seems that every few months a new, high-profile case emerges from the region, leaving banks scrambling to protect themselves.
To understand how banks affected by this latest fraud can seek to recoup their losses, and protect themselves from similar deceptions, GTR speaks to Jessica Kenworthy and Barry Stimpson, partners at Squire Patton Boggs in Singapore. Kenworthy specialises in complex commodity financings and ship financing. She has been involved in a wide range of commodity finance-related transactions, in particular acting for lenders, trading houses and multilaterals. Stimpson has more than 25 years’ experience of handling matters in the international trade, shipping, offshore energy, construction and insurance sectors. He has been based in Asia since 1999 and previously worked in London, Hong Kong, Singapore and Sydney covering both disputes and advisory work.
GTR: Given the sums involved, the alleged fraud by Agritrade brings to mind the Qingdao case. Are there similarities between the two?
Kenworthy: This scenario is different to a Qingdao situation where you can do your due diligence on the warehouse receipt by actually going to the warehouse and checking that the goods are there, putting in a collateral monitoring or management arrangement so that you can check that things are actually as they are supposed to be. This is not exactly the same as that type of fraud in terms of the due diligence that you can do, but there are things that you can do to protect your interests.
Stimpson: One high-level observation on the differences between warehouse receipts and bills of lading is that bills of lading perform two functions that are really the lifeblood of international trade. They are, for the purposes of international sale contracts, a document of title. They also perform another very important function as a suite of contractual rights against whoever the carrier is under the bill. If something happens to the cargo on board the ship, the bill of lading should give the right to sue the shipowner. That is obviously important, because as a cost, insurance and freight (CIF) or free on board (FOB) buyer, what you are buying from your seller is not a guarantee that the goods will arrive at the end port in good condition. What you are buying is the goods and the right to sue the carrier if they do not. So, from the seller’s point of view, they are essentially discharging their obligation by providing a valid bill of lading plus the goods. It is not like a warehouse where the goods remain in the warehouse throughout. There is a period of time where the cargo is afloat and being transported in the possession of that third-party shipowner or carrier.
It is possible to do due diligence in the context of bills of lading, but it is more difficult than it would be in the case of the warehouse receipt, where it would not be uncommon to have direct communication with the party who is taking the receipt and the warehouse. It is easier to check the veracity of the receipt and confirm that the warehouse actually has the goods.
GTR: How common is this type of fraud?
Stimpson: I’ve been based in Asia for 20 years now, and during that time in practice there have been a number of these kinds of schemes with multiple sets of bills of lading for the same cargo or for non-existent cargoes. Bill of lading fraud has been a major issue over decades. This is a paper document and it is susceptible to fraud in a way that many of the other documents are not. The scam has a number of variants to it. These scenarios tend to come to light during difficult economic times. Although they are going on in good times, they often go under the radar because nobody defaults.
GTR: Is a duplicate BL always an indicator of fraud?
Stimpson: There are often good commercial reasons why there are duplicate sets of bills of lading floating around. It is really common, albeit high-risk from a shipowner’s point of view. The shipowner has the legal authority to issue a bill of lading for cargo that is loaded on board the vessel, but often the right to do so is also given to the charterer of the ship. The shipowner will usually receive the right to an indemnity from the charterer for allowing this. That is a really important right to have from the charterer. Often the charterer is a trader who doesn’t want to reveal to the buyers of the cargo where and who they are getting it from, so they will issue a duplicate bill of lading naming themselves as the shipper, but everything else is accurate and it is a genuine bill which is likely to be binding in the hands of a third party. So, that is one of the reasons why often you will find duplicate bills floating around. It is potentially fraudulent but in most cases the intention is not to defraud; it is more to hide commercial relationships.
GTR: Are digital BLs the answer?
Stimpson: Digital bills of lading are still are not recognised in most jurisdictions as documents of title. Having said that, what you can do through a system of contractual obligations to which everybody signs up is essentially create the same result. So, it’s more cumbersome, it’s more difficult to trade that way, but it certainly adds a layer of security that you do not have when you are simply using paper.
Kenworthy: To work well, when using electronic bills of lading everybody in the trade would sign up to the same contractual terms, and that then creates the rights and obligations all the way along the chain to make the electronic bill of lading work in those instances. However, it may not be practical for everyone in a long chain to work on the same terms.
GTR: What mistakes do banks commonly make with regard to BLs?
Stimpson: There are still basic mistakes that are made all the time in relation to bills of lading. One of the first questions that you need to ask yourself as a bank taking a bill of lading is who the carrier is under the bill, and there is often an erroneous assumption that it is the shipowner. You need it to be the shipowner, because if it does go wrong, the best person in a maritime law context to be able to sue is a shipowner because you can arrest the ship. It is much easier to arrest a ship than getting an injunction from the courts. In many countries, it is a simple paper application, but it is a fantastic remedy for a party looking to recover for misdelivery of cargo, for example. And it is very often the shipowner that is left exposed in those circumstances.
We have represented a number of shipowners who faced misdelivery claims from receivers where there simply wasn’t a cargo, but a bill had been issued which was binding on the shipowners in that case. Misdelivery claims are really difficult for shipowners. The golden rule for a shipowner is that you should only ever deliver cargo against production of an original bill of lading. If you do not do that, it means that usually you have no defence to a claim for misdelivering the cargo. Most importantly from a shipowner’s point of view, that is a liability that their liability insurers, the P&I clubs, will not cover.
The rub on that in many trades is that it takes so long for documents to work their way through the banking chain that the bills of lading are not available at the discharge port, so what happens is that the cargo is delivered against a letter of indemnity. If the shipowner is going to deliver cargo without production of original bills, they should be looking for a letter of indemnity backed up by a bank guarantee or at least a solid corporate guarantee.
Kenworthy: It is quite astounding sometimes how bad a document can seem and be accepted. In a recent analysis of documents for a potential trade fraud, we have seen font issues, clear areas of the documents that were lighter than others, clear copy-and-pastes of signatures from one document to another, so these are things to look out for. Sometimes, because of the volumes of documents, people sometimes just open and close them and they are probably not really looking for the signs of tampering, because of volumes or because all the trades before had gone to plan, so there is a level of comfort there already.
Stimpson: It is often obvious from looking at fraudulent bills that there are problems, so it would appear likely that the due diligence has not been done at the level it should have been done on the documents themselves, and that is perhaps symptomatic of banks being too relaxed. While it may not be practical to do due diligence on every single trade and on every single bill, it can still be done on a random sampling basis.
GTR: How can banks combat BL fraud?
Stimpson: In a scenario like this where there is concern about bills of lading because it is so easy for fraud to take place, one solution is to get guarantees or collateral to cover the bank for all or most of the exposure that a bank is taking on, and I have seen that done over the years. It is often quite effective where there are personal guarantees that banks are able to enforce, so that is certainly one way of putting in a layer of protection.
Unfortunately, what often happens in these cases, and the fraudsters are very clever at doing this, is that they will put a few legitimate trades through the system first to build up a level of confidence and degree of comfort with the bank, and then it’s only after the bank has become more relaxed around the documents and the customer that they start to carry out the fraudulent activity.
GTR: What options do banks have to recover their funds as victims of this fraud, and what will the banks involved be seeking to do?
Kenworthy: It is quite a difficult situation, because you do not have the real document of title that enables you to take possession of any goods.
Stimpson: The scenario which is in many ways the bank’s worst nightmare is a deliberate fraud, because it’s not a case of a genuine bill of lading and cargo where something has gone wrong, and where the bank would have rights against a third party.
Where you have got a deliberate fraud and there are multiple fraudulent sets of bills issued for non-existent cargo, those fraudulent bills are a nullity. The bank still has the right to pursue its customer for the fraud, but it is not going to have rights against the third-party carrier under a bill, because the carrier never issued the bill.
If it is a case where there is a fraud by the bank’s customer alone, that limits the options. There remains the option of following the money, so the bank could try to freeze the funds before they disappear, if they can trace the funds, but the difficulty with that is usually one of timing. If you are aware of it as it is happening and you know the bank accounts being used, you can often catch it before it’s dissipated, then that is a good way of trying to recover some of the fraudulent proceeds. But in cases like this where the fraud comes to light at a later stage, that becomes very difficult because the money has usually already gone.
This is the worst variant of the fraud where you have got a deliberate, mass fraud with documents that are not genuine, so they cannot give you any rights against third parties. The whole idea behind the bill of lading or a warehouse receipt is it does give you rights against the third party and not simply against your counterparty or in this case the party who you financed.
Kenworthy: It is quite similar to Qingdao in a way, in that if a buyer didn’t receive a valid warehouse receipt in the beginning of a repo trade, for example, then how can you force the repurchase of certain assets later on if you don’t actually have any genuine rights in respect of those assets to give back? Here, it’s not the same set of facts, but a financier is in a situation where it is trying to take or enforce security over the documents representing goods – and the goods represented by those documents, and the misfortune is that there is therefore potentially no secured asset, because it is a completely fraudulent asset as the document representing the goods is not genuine. It is a very tricky situation to then try and trace through either to get the proceeds or the goods, because the goods will likely have gone to third-party purchasers who were not on notice, and they were probably passed completely valid bills of lading representing those goods under some other contractual chain. It is a very difficult situation now to recover.